Ventilation Division: Industrial Air Filtration System (IAFS) Projections

The Ventilation Division will manufacture the IAFS using idle facilities.

This plant can produce up to 260 units per year over the products 10-year life.

An outside appraiser indicated that the plant is worth $3,000,000,

which breaks down as $1,400,000 for the land and $1,600,000 for the building.

New production equipment costing $5,800,000 is also required.

It is believed that the land will have a residual value of $1,800,000 at the end of the projects life,

while the building and equipment will be worth $500,000 and $250,000.

The building is subject to a CCA rate of 4.0% and the equipment is subject to a CCA rate of 20.0%.

Incremental net working capital of $600,000 is also needed, which will be liquidated at the end of the products life.

IAFS sales are estimated to be 70 units in the first year and will grow by 25.0% a year until plant capacity is reached.

The unit price is $120,000 and unit costs are $100,000 per unit, which includes direct materials, direct labour, and manufacturing overhead.

The Ventilation Division must also pay a $10,000 licensing fee per unit for the vacuum cleaner technology. Incremental selling and administration costs will be $350,000 per year.